Keep Tipping Your Servers

Owners of Applebees, Denny’s, and Papa John’s are whining about Obamacare. Don’t take them seriously.

A Denny's franchise owner has decided to charge an "Obamacare" surcharge to his customers

Photo by Justin Sullivan/Getty Images.

The No. 1 consequence of Obama’s re-election is that it essentially guarantees his signature health care law will be implemented. And not everyone is happy about it. Zane Tankel owns about 40 Applebees franchises. He says that as a result of the law’s penalties on employers who don’t offer health insurance to their workforce “we won’t build more restaurants, we won’t hire more people.” John Metz owns about 40 Denny’s outlets, several Dairy Queens, and is the brains behind the Hurricane Grill & Wings chain is even blunter. He says he’ll be tacking a 5 percent surcharge onto customers’ bills in order to defray the costs of Obamacare.

If you’re not happy about that surcharge, he’s got an answer for you. Cranky customers “can reduce the amount of tip they give to the server, who is the primary beneficiary of Obamacare.”

These guys are being jerks, but they’re helpfully bringing to light what was obscured during the original debate over the health care bill—rich businessmen don’t like it because it raises their taxes. The Republican Party is very sensitive to the views of rich businessmen, and so they didn’t like the health care bill. The debate, unfortunately, got bogged down in a lot of nonsense about death panels and socialism rather than focusing on the brass tacks stuff that matters. Low-income workers—the kind of people likely to be working as servers at Denny’s—really will see huge benefits from the law. And the kind of people who own dozens of chain restaurant franchises really will suffer, at least a bit.

Advertisement

The main issue facing chain restaurant owners is the law’s “employer responsibility” provision. If you’re a small employer with fewer than 25 employees, the Affordable Care Act is extremely generous to you and you’ll get special subsidies to help make an insurance plan for your workers affordable. But if you have over 50 employees, then it’s another matter. If everyone on your payroll already gets group health insurance, you’re in the clear. If they don’t, but they’re all paid enough to buy insurance on the new insurance exchanges without a subsidy, then you’re also in the clear. But if you’re employing low-wage workers who’ll get subsidies for their new insurance plans, then you’re going to get taxed to the tune of $2,000 a worker.

For a few categories of employer, this is supposed to encourage businesses to offer health insurance. But in many cases, especially in the food service sector, it’ll be much cheaper to pay the tax than to add a more generous benefits package. Naturally employers don’t like that.

But what’s the scale of the issue here?

John Schnatter, CEO of Papa John’s and a major Mitt Romney donor and fundraiser, gave us a hint in an August call with shareholders when he complained that it would raise costs about 11 to 14 cents per pizza. That’s peanuts. Between variations in sales taxes, fluctuations in ingredient costs, and place-to-place differences in rents, any food chain is used to dealing with price swings on this magnitude. At worst, an increase in labor costs along these lines is going to mean that cash wages in the service sector grow at a modestly slower rate for the next year or two.

Advertisement

That said, there is good reason to be generally skeptical of the idea that legislative fiat can increase workers’ compensation. Compensation is ultimately going to be driven by productivity, not the whims of Congress. But if there was ever a good time to give it a shot, it’s probably now. The labor compensation share of overall economic output has historically fluctuated in a narrow range, but it fell steadily in the post-dot-com era before completely collapsing during the Great Recession. The existence of a glut of unemployed workers during the past few years of recovery has prevented the fruits of economic growth from being shared with most workers. Consequently, after-tax corporate profits as a share of GDP have soared to a record level.

In other words, if there was ever a time when firms were prepared to eat higher costs because of reduced profits that time is today.

Indeed, evidence from San Francisco suggests we should be very suspicious of firms pleading poverty as they charge surcharges. The city adopted pioneering universal health care legislation that, like Obamacare, imposed higher costs on some classes of employers. Many of them responded with special health care surcharges. Upon investigation, much of this surcharge money just ended up in the pockets of business owners, as with any other price increase.

There’s not necessarily anything wrong with that. The fees airlines charge for extra checked bags aren’t in any literal sense pegged to the cost of baggage handling. It’s just a way of raising prices on some customers. That’s business. If Denny’s thinks it’ll make more money by raising prices 5 percent, they’re free to do so and call it whatever they want. Maybe specifically blaming Obama for price hikes with a special surcharge will make customers feel better about paying more, or maybe whining will drive liberal customers away. But there’s no reason to take this any more seriously than any other marketing gimmick.